Duff & Phelps congratulates online music streaming service Tencent Music Entertainment Group (NYSE: TME) (Tencent Music) on its initial public offering (IPO) on the New York Stock Exchange on December 12. Duff & Phelps was engaged as a professional independent valuer for Tencent Music’s IPO with respect to the valuation of the employee share incentive plan, share based payment and purchase accounting for acquired entities including China Music Corp. for financial reporting purpose.

A spinoff of China tech conglomerate Tencent Holdings Limited (HKSE: 0700/OTCMKTS: TCEHY), Tencent Music represents a sprawling ecosystem that incorporates the popular karaoke WeSing app and three music streaming apps: QQ Music, Kugou Music and Kuwo Music.

The IPO allows Western investors to buy in at an opportune time for Chinese tech startups. Tencent Music hopes to capitalize on China’s runaway smartphone penetration rate of 55.8 percent, or 772 million active users as of December 2017.1

Socially Interactive Services

Tencent Music was formed in 2016 with the purchase of a controlling stake in China Music Corp. by Tencent Holdings, through injection of Tencent Holding's existing music streaming services.

As China’s leader in music streaming, Tencent Music reaches over 800 million monthly active users (MAUs) – an estimated 75 percent of China's streaming music market 2 – who each spend an average of over 70 minutes a day engaged with their respective platforms. 3 (By way of comparison, rival streaming service Spotify has only 170 million MAUs.) 4

Tencent Music differentiates itself from its rivals by deriving revenues from socially interactive services. WeSing app users, for instance, can send virtual gifts to their favorite performers on the platform – “providing with an effective channel to interact with their fans and an attractive way to monetize their performance,” their SEC filing explains. 5

Younger Userbase Against Piracy

Social entertainment services made up 70.4 percent of Tencent Music’s revenues from January to September 2018. (The balance of the company’s revenues come from music downloads, streaming subscriptions and ad placements.)

For the same nine-month period, Tencent Music reported a profit of US$394 million on sales of nearly US$2 billion, representing a jump in revenue of 83 percent compared to 2017.

Tencent Music has the largest music content library in China, with a catalog of over 20 million tracks from over 200 major domestic and international music labels. This growing web of partnerships, combined with a youthful user base that lacks older users’ predilection for pirating music, allows Tencent Music to leverage new revenue streams like digital album sales and live concert broadcasts.

“Youngsters in China are really getting a lot more educated than the older guys,” explains Tencent Music Vice President Andy Ng. “They know content has a value, and they respected that, so they are willing to pay for the music services.” 6

Strong Impression

Tencent Music and its selling shareholders received US$1.1 billion through the IPO, selling 82 million American depositary shares at an offering price of US$13 per American depositary receipt. At its debut, Tencent Music made a strong impression on public markets that persisted until the final bell, closing at US$14.19 at a solid 9.2 percent gain in price. As of the end of the first trading day, Tencent Music maintained a market cap of US$21.3 billion. 7